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Tangling the Web: Making Sense of Online Market Power

Recent business headlines are sending an unmistakable signal: expect the unexpected. Netflix (NFLX) is talking to arch-enemy cable TV providers about possible alliances. Walmart (WMT) – the undisputed champion of the mall wars – is recruiting Silicon Valley whiz kids so it can go head-to-head with Amazon (AMZN) on the latter’s cyber-turf. Meanwhile, Amazon is continuing to expand its brick-and-mortar presence, spending some $14 billion on 50 warehouses since 2010 in order to speed order fulfillment.

This is all evidence, of course, of the running-to-stay-in-place reality of retailing in the digital era. Less well understood, it’s also a sign of how difficult it has become to police (or even identify) market power because businesses are busy erasing the distinctions that regulators have long relied upon in crafting rules of competition.

What’s the impact on consumers if Netflix teams up with cable and satellite providers, who (rightly) see it as a threat to the existence of pay-TV? Would cooperation undermine competition, or is the very notion just one more example of how stuffing companies in old siloes doesn’t work anymore? Is it a plus for consumers if Walmart cuts into Amazon’s online dominance – or would consumers lose in the end because it would add to Walmart’s clout in the broader market for retail goods?

That these questions are even on the table suggests the elusive nature of markets today. Shaping markets to maximize competition is a daunting task even when they are relatively static. It becomes darn near impossible when the lines between markets are being redrawn at the speed of the Internet. As Hal Singer and one of us (Bob Hahn) wrote earlier this year in the Milken Institute Review, regulators are relying on 20th century strategies to fight 21st century battles.

Amazon, Apple (AAPL), Google (GOOG) and Facebook (FB), for example, are widely identified with their own signature businesses. Yet they have repeatedly invaded each other’s turf – and often with the objective of enhancing the value of their business platforms rather than increasing profits in the near term.

Regulators with General Motors (GM) or Exxon (XOM) more in mind than Apple or Twitter take it as faith that rivals compete by offering better quality or lower prices for familiar products. But today’s Internet behemoths are more inclined to trump the competition with new technologies and new sorts of services. And they rarely view the potential payoff in terms of dollars extracted directly from consumers today. Just consider Amazon, a company with an envious market share and a market capitalization of $166 billion as this is being written, which has never made a profit.

Regulators still have a vital role to play in protecting consumers against glaring abuses of market power, not to mention online fraud and violations of privacy. But refereeing market shares and second-guessing novel ways of luring customers is an invitation for error and stagnation.

Robert Hahn is director of economics at the Smith School, University of Oxford, and a senior fellow at the Georgetown Center for Business and Public Policy. Peter Passell is a senior fellow at the Milken Institute, a Santa Monica-based think tank, and editor of the Milken Institute Review

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